International Narcotics Control Strategy Report 2007

Volume I: Drug and Chemical Control
Released by the Bureau of International Narcotics and Law Enforcement Affairs
March 2007

Europe and Central Asia

Serbia

I. Summary

Organized crime groups use Serbia, a center point on the Balkan smuggling route, as a transit point for the transfer of heroin, cocaine, marijuana and other synthetic drugs. A small portion of smuggled narcotics remains in Serbia for domestic consumption. Serbia is developing and enacting new laws and law enforcement initiatives, including the National Strategy for the Fight Against Drugs, but a weak legal infrastructure and endemic corruption will make the fight against narcotics and drug smuggling a long process. As legal successor to the state union of Serbia and Montenegro and the Former Yugoslavia, Serbia is party to the 1988 UN Drug Convention.

II. Status of Country

Serbia is primarily used as a transit country for the movement of narcotics, but the ability of organized crime groups to exploit the porous borders and weak infrastructure threatens political stability and economic development of this developing country. The Ministry of Interior notes that the Sandzak portion of Serbia, with its capital of Novi Pazar, is most problematic because of its geographical position near the Montenegrin and Kosovo border on the smuggling route and the storage of large quantities of drugs in the region. The Serbian government estimates that a small portion of narcotics trafficking through Serbia remains in country for domestic consumption. Heroin appears to be the most prevalent.

III. Country Actions Against Drugs in 2006

Policy Initiatives. Articles 246 and 247 of the General Crime law regulate countermeasures against drug crimes in Serbia, both for production, trafficking and usage of narcotics. A newly implemented law on Chemical Substance and Production for synthetic drugs, based on European standards, requires the Ministry of Health to monitor the substances acquired and used by foreign and domestic companies operating in Serbia. The law also allows the Ministry of Interior to get approval from the Ministry of Health to investigate certain companies or individuals in possession of chemical substances. A new law on criminal procedures has also been completed that stipulates that narcotics seized should be destroyed, except for a small sample to be used in court, instead of stored in often less than secure warehouses by the Ministry of Interior or the Ministry of Justice. Serbia is continuing to establish and promote relations with neighboring countries, including Bulgaria, Romania, Croatia, Hungary, and Bosnia and Herzegovina to combat the transport of narcotics across their common borders.

Law Enforcement Efforts. The Drug Unit in the Ministry of Interior is the central unit that polices narcotics smuggling and usage of heroin, cocaine, marijuana, and synthetic drugs throughout the entire territory of Serbia. The Drug unit is responsible for coordinating cooperation and information exchanges with smaller police units located throughout Serbia as well as with Customs officials, the Ministry of Justice and Interpol. The Drug Unit is currently trying to create one database with all narcotics-related crimes, arrests and seizures, but a shortage of financial and technological assistance is hampering its implementation. Officers in the Ministry of Interior participate in workshops organized by the OSCE and other international organizations and intend on continuing training exercises with regional neighbors, including Bulgaria and Romania. The Ministry hopes to have these officers who are trained in combating narcotic-related crimes train their fellow officers in the police force and drug unit. The Drug Unit reports that through nine months of 2006 they have seized around 6.5 kg of cocaine, 150 kg of heroin, 5 kg of hashish and 989 grams of Marijuana. This data excludes any information from local police branches. The unit estimates that by the end of 2006, they will probably seize around 1/2 ton of heroin and more marijuana. The Customs Administration of Serbia reports that in the first nine months of 2006, they have seized 228 kg of heroin, 36 kg of ephedrine, 18 kg of Ecstasy, and fractional quantities of cocaine, HCL, hashish and marijuana.

Corruption. Corruption is endemic in Serbia and is prevalent throughout the legal infrastructure of the country. The Serbian government does attempt to prosecute instances of corruption, but because it is so accepted by society, is often hard to identify. There are no reports that senior government officials engage in, encourage, or facilitate the production and distribution of narcotic and psychotropic drugs and there is also no evidence that Serbia, as a matter of government policy, encourages or facilitates illicit production or distribution of narcotic or psychotropic drugs or actively launder proceeds from illegal drug transactions. Serbia is a party to the UN Convention against Corruption.

Agreements and Treaties. Serbia became the legal successor state to the state union of Serbia and Montenegro on June 3, 2006. All international treaties and agreements continue in force, including the 1988 UN Drug Convention, the 1961 UN Single Convention as amended by the 1972 Protocol, the 1971 UN Convention on Psychotropic Substances, and the UN Convention against Transnational Organized Crime and its protocols against trafficking in persons and migrant smuggling.. Serbia currently has a bilateral agreement with Romania for the training of Serbian officers, and has cooperation agreements with Slovenia, Croatia and Bosnia and Herzegovina on border control issues meant to stop cross-border narcotics transfers. The 1902 extradition treaty between the United States and the Kingdom of Serbia remains in force between the U.S. and Serbia.

Drug Flow/Transit. Serbia is located in the center of the smuggling and transit route along the Balkan road. Heroin is smuggled from Turkey and moves through Bulgaria into Serbia and then onward into Western Europe. Small amounts of heroin stay in the country, but Serbia mostly serves as a transit point. Cocaine usually comes from South America into Serbia via Spain, Italy and Greece, while synthetic drugs typically originate in the Netherlands and are generally used for trading for other narcotics, including heroin.

Domestic Programs (Demand Reduction). Experts from the Belgrade Institute on Drug Abuse estimate that currently there are 60,000-80,000 drug users in Serbia. A task force of government ministries, including the Ministry of Health, the Ministry of Interior the Ministry of Justice and the Ministry of Education and Sport is developing a National Strategy for the Fight Against Drugs, which incorporates antinarcotics programs used by neighboring countries, and adheres to EU-regulated standards.

IV. U.S. Policy Initiatives and Programs

Bilateral Cooperation. The Serbian Government works closely with the United States and EU countries in reforming and improving its law enforcement and judicial capacity. The United States has provided extensive technical assistance, equipment donations and training to the police, customs services, and judiciary. Several USG agencies have programs that directly or indirectly support counternarcotics activities in Serbia, including the Department of Justice (ICITAP), Department of Homeland Security, Department of Defense, Department of the Treasury, and Department of State. The Department of State and Justice have also been instrumental in supporting the new Organized Crime Court and the new Special Court for Organized Crime and War Crimes. The programs are aimed at professionalizing the police and customs services, improving the ability of Serbia to prosecute corruption and organized crime, including money laundering and illicit trafficking, and increasing the ability of the judiciary to effectively address serious crime.

The Road Ahead. The United States will continue to work with Serbia to improve the administration of justice and narcotics law enforcement. During the next year the U.S. hopes to see further progress in Serbian justice sector development and efforts to combat organized crime and narcotics. This includes increased seizures of narcotics, attempts to prosecute corruption at senior levels, and efforts to reduce domestic narcotics demand.

International Narcotics Control Strategy Report 2007

Volume II: Money Laundering and Financial Crimes
Released by the Bureau of International Narcotics and Law Enforcement Affairs
March 2007

Country Reports

Serbia

Serbia is not a regional financial center. At the crossroads of Europe and on the major trade corridor known as the "Balkan route," Serbia confronts narcotics trafficking, smuggling of persons, drugs, weapons and pirated goods, money laundering, and other criminal activities. Serbia continues to be a significant black market for smuggled goods. Illegal proceeds are generated from drug trafficking, official corruption, tax evasion and organized crime, as well as other types of crimes. Proceeds from illegal activities are invested in all forms of real estate. Trade-based money laundering, in the form of over- and under-invoicing, is commonly used to launder money.

A significant volume of money flows to Cyprus, reportedly as the payment for goods and services. The records maintained by various government entities vary significantly on the volume and value of imports from Cyprus. According to official statistics from the National Bank of Serbia, over $1 billion in payments in 2005, coded as being for goods and services, rank Cyprus among the top five exporters of goods or services to Serbia. The Serbian Statistical Office reflected imports from Cyprus of roughly $40 million in 2005. According to Government of the Republic of Serbia (GOS) officials, much of the difference is due to payments made to accounts in Cyprus for goods, such as Russian oil, that actually originate in a third jurisdiction.

Serbia's banking sector is more than 80 percent foreign-owned. There is no provision in the banking law that allows the establishment of offshore banks, shell companies or trusts. Reportedly, there is no evidence of any alternative remittance systems operating in the country. Nor, reportedly, is there evidence of financial institutions engaging in currency transactions involving international narcotics trafficking proceeds. Serbia has 14 designated free trade zones, three of which are in operation. The free trade zones were established to attract investment by providing tax-free areas to companies operating within them. These companies are subject to the same supervision as other businesses in the country.

As the result of a public referendum on May 21, 2006, the State Union of Serbia and Montenegro (SAM) was dissolved and Montenegro became an independent country. The GOS became the legacy member of the Council of Europe and the United Nations. As a result, all treaties and agreements signed by the State Union are now applicable to Serbia, including the1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. The GOS is a party to all 12 UN Conventions and Protocols dealing with terrorism, including the UN International Convention for the Suppression of the Financing of Terrorism, although domestic implementation procedures do not provide the framework for full application. In December 2005, the GOS ratified the UN Convention against Corruption.

In September 2005, Serbia codified an expanded definition of money laundering in the Penal Code. This legislation gives police and prosecutors more flexibility to pursue money laundering charges, as the law broadens the scope of money laundering and aims to conform to international standards. The penalty for money laundering is a maximum of 10 years imprisonment. Under this law and attendant procedure, money laundering falls into the serious crime category and permits the use of Mutual Legal Assistance (MLA) procedures to obtain information from abroad.

On November 28, 2005, Serbia adopted a revised anti-money laundering law (AMLL), replacing the July 2002 Law on the Prevention of Money Laundering. The revised AMLL expands the number of entities required to collect certain information on all cash transactions over EUR 15,000 (approx. $19,500), or the dinar equivalent, and to file currency transaction reports (CTRs) for all such transactions exceeding this threshold to the financial intelligence unit (FIU). Suspicious transactions in any amount must be reported to the FIU. The law expands those sectors subject to reporting and record keeping requirements, adding attorneys, auditors, tax advisors and bank accountants, currency exchanges, insurance companies, casinos, securities brokers, dealers in high value goods and travel agents to those already required to comply with the AMLL provisions. Required records must be maintained for five years. These entities are protected with respect to their cooperation with law enforcement entities. The AMLL requires obligated entities and individuals to monitor customers' accounts when they have a suspicion of money laundering, in addition to reporting to the FIU. The AMLL also eliminates a previous provision limiting prosecution to crimes committed within Serbian territory. Significant improvement has been noted in financial institution compliance, i.e., gathering and keeping records on customers and transactions. The flow of information to the FIU has been steadily increasing, but not all entities are yet subject to implementing bylaws.

The Law on Foreign Exchange Operations, adopted in 2006, criminalizes the use of false or inflated invoices or documents to effect the transfer of funds out of the country. This law was enacted in part to counter the perceived problem of import-export fraud and money laundering. According to the law, residents and nonresidents are obliged to declare to Customs authorities all currency (foreign or dinars), or securities in amounts exceeding EUR 5,000 being transported across the border.

The National Bank of Serbia (NBS) has supervisory authority over banks, currency exchanges, insurance and leasing companies. The NBS has issued regulations requiring banks to have compliance and know-your-customer (KYC) programs in place and to identify the beneficial owners of new accounts. In June 2006, the NBS expanded its customer identification and record keeping rules by adopting new regulations mandating enhanced due diligence procedures for certain high risk customers and politically exposed persons. Similar regulations are being developed for insurance companies. The Law on Banks includes a provision allowing the NBS to revoke a bank's license for activities related to, among other things, money laundering and terrorist financing. To date, the NBS has not used this revocation authority. The legal framework is in place, but the NBS currently lacks the expertise needed for effective bank supervision. It is building these capacities through training and staff development.

The Securities Commission (SC) supervises broker-dealers and investment funds. The Law on Investment Funds and the Law on Securities and Other Financial Instruments Market provide the SC with the authority to "examine" the source of investment capital during licensing procedures. The SC is also charged with monitoring its obligors' compliance with the AML Laws. Regulations to implement this authority are being developed.

The Administration for the Prevention of Money Laundering serves as Serbia's FIU. The revised AMLL elevates the status of the FIU to that of an administrative body under the Ministry of Finance from its previous status as a "sector" in that Ministry. This provides more autonomy for the agency to carry out its mandate, as well as additional resources. One important change is that the FIU now has its own line item operating budget. The FIU currently has 24 employees. In accordance with the revised AMLL, the FIU developed listings of suspicious activity red flags for banks, currency exchange offices, insurance companies, securities brokers and leasing companies. Other significant changes include the authority of the FIU to freeze transactions for a maximum of 72 hours. The FIU has signed memoranda of understanding (MOU) on the exchange of information with the NBS and Customs and is negotiating one with the Tax Administration.

The FIU received 279 suspicious transaction reports (STRs) in 2005 and 361 through September 1, 2006. Virtually all of the STRs received by the FIU have been filed by commercial banks. Currency exchange offices have filed only seven STRs since 2003, and none in either 2005 or 2006. Since its inception in 2003, the FIU has opened 240 cases, 74 based on the STRs it received and 166 based on CTRs or referrals from other entities; 103 cases were referred to either law enforcement or the prosecutor's office for further investigation. Since 2004, authorities filed 41 criminal charges against 48 persons for money laundering violations. The most common predicate crime is "abuse of office". Of this number, eighteen are currently under investigation, six were dismissed or terminated; fourteen were indicted; and two court decisions have been reached to date. One person has been acquitted and the other was convicted, but has appealed the verdict.

Serbia introduced a value-added tax (VAT) in 2005, and the full impact of refund fraud associated with the administration of the VAT is still not clear. Serbia's Tax Administration lacks the audit and investigative capacity or resources to adequately investigate the large number of suspicious transactions that are forwarded by Serbia's FIU. In addition, current tax law sets a low threshold for auditing purposes and has increased the burden on the Tax Administration. This creates a situation where criminals can spend and invest criminal proceeds freely with little fear of challenge by the tax authorities or other law enforcement agencies.

The difficulty of convicting a suspect of money laundering without a conviction for the predicate crime and the unwillingness of the courts to accept circumstantial evidence to support money laundering or tax evasion charges is hampering law enforcement and prosecutors in following the movement and investment of illegal proceeds and effectively using the anti-money laundering laws. The Suppression of Organized Crime Service (SOCS) of the Ministry of Interior houses a new Anti-Money Laundering Section to better focus financial investigations.

In August 2005, the GOS established the Permanent Coordinating Group (PCG), an interagency working group originally tasked with developing an implementation plan for the recommendations from MONEYVAL's first-round evaluation in October 2003. A subgroup was tasked with drafting a new law to address the procedures needed to comply with UN Security Council resolutions regarding the freezing, seizing and confiscation of suspected terrorist assets, and to require reporting to the FIU of transactions suspected to be terrorist financing. The PCG meets intermittently as required for completing specific tasks. The government still needs better interagency coordination to improve information sharing, record keeping and statistics.

Under Serbian law, assets derived from criminal activity or suspected of involvement in the financing of terrorism can be confiscated upon conviction for an offense. The FIU is charged with enforcing the UNSCR 1267 provisions regarding suspected terrorist lists. A draft law on terrorist financing, now pending Parliamentary approval, will apply all provisions of the AML laws to terrorist financing and will implement a freezing mechanism based on UNSCR provisions. Although the FIU routinely provides the UN list of suspected terrorist organizations to the banking community, examination for suspect accounts have revealed no evidence of terrorist financing within the banking system and no evidence of alternative remittance systems. The SOCS, the Special Anti-Terrorist Unit (SAJ), and Gendarmarie, in the Ministry of Interior, are the law enforcement bodies responsible for planning and conducting the most complex antiterrorism operations. SOCS cooperates and shares information with its counterpart agencies in all of the countries bordering Serbia. Although Serbia has criminalized the financing of terrorism, the freezing, seizing and confiscation of assets of terrorists in accordance with UN Security Council resolutions still lacks a legal basis, pending enactment of the Anti-terrorism Finance legislation.

Serbia has no laws governing its cooperation with other governments related to narcotics, terrorism, or terrorist financing. Bases for cooperation include participation in Interpol, bilateral cooperation agreements, and agreements concerning international legal assistance. There are no laws at all governing the sharing of confiscated assets with other countries, nor is any legislation under consideration.

Serbia does not have a mutual legal assistance arrangement with the United States, but information exchange via a letter rogatory is standard. The 1902 extradition treaty between the Kingdom of Serbia and the United States remains in force. The GOS has bilateral agreements on mutual legal assistance with 31 countries. As a member of the Council of Europe, the GOS is an active member of the Council's MONEYVAL. In July 2003, the FIU became a member of the Egmont Group and actively participates in information exchanges with counterpart FIUs including FinCEN. The Serbian FIU has also signed information sharing memoranda of understanding (MOUs) with Macedonia, Romania, Belgium, Slovenia, Montenegro, Albania, Georgia, Ukraine, Bulgaria, Croatia, and Bosnia and Herzegovina.

Serbia should continue to work toward eliminating the abuses of office and culture of corruption that enables money laundering and financial crimes. Among the pending legal infrastructure necessary for Serbia to be fully compliant with international standards are laws providing for the liability of legal persons for money laundering and terrorist financing; regulations to apply all requirements of the Revised AML Law to covered nonbank financial institutions; legislation to establish a robust asset seizure and forfeiture regime; and legislation providing for the sharing of seized assets. Serbia also needs to enact and implement proposed legislation needed to comply with UN Security Council resolutions regarding the freezing, seizing and confiscation of suspected terrorist assets and require suspicions of terrorist financing to be reported to the FIU.

The National Bank and other supervisory bodies need training and additional staff. The GOS should enforce regulations pertaining to money service businesses and obligated nonfinancial business and professions. The supervisory scheme should be completed, and implementing regulations should be binding, for the insurance and securities sectors. On an operational level, law enforcement needs audit and investigative capacity in order to investigate the STRs that the FIU disseminates. Training is also required for prosecutors and judges. Rather than address specific tasks as an ad hoc group, the PCG should meet on a regular basis to discuss issues and projects, and work to improve interagency coordination in such areas as information sharing, record keeping and statistics.

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